Summary: On 1 April 2018, new regulations come into force which will introduce significant changes to the regulatory obligations on UK fulfilment houses. There are serious consequences for non-compliance. In this blog, we outline some of the key deadlines and steps which UK fulfilment houses should be taking to prepare for the introduction of the Fulfilment Business Regulations 2018.

As tax avoidance and evasion remain high on the political agenda, new measures to clamp down on online VAT and customs fraud will come into force on 1 April 2018. The Fulfilment Business Regulations have been introduced by the government to combat a perceived gap in revenue streams through tax evasion by non-European Union traders who sell goods to UK consumers via online marketplaces. The use of fulfilment houses is considered by the government to be a key factor in allowing this abuse, as VAT is not always properly accounted for when the imported goods are supplied to the final customer in the UK.

The new Regulations will impose extensive due diligence and reporting obligations on fulfilment houses. As these businesses are not currently subject to any requirements in terms of customer due diligence or verification of customs declarations in respect of stored goods, the Regulations will necessitate, in some cases, a considerable change in how fulfilment houses operate. This is indicative of a growing trend in recent legislation which effectively shifts the burden of policing compliance with tax law from HMRC onto businesses, who are tasked with both ensuring compliance and reporting non-compliance by their customers.

Requirement for approval

The Regulations apply to fulfilment businesses that store third country goods which are owned by a person established outside the EU where the goods are being offered for sale and haven’t previously been sold in the UK.

From 1 April 2019, a person may not carry on a third country good fulfilment business unless they have received approval from HMRC. Registration for approval opens online on 1 April 2018. For a business that is already trading as a third country goods fulfilment business the final deadline for registering is 30 June 2018. Businesses which commence trading between 1 April and 30 June 2018 must register by 30 September 2018, and businesses which commence trading from 1 July 2018 onwards must register by the earlier of 30 October 2018 or the date on which they start trading.

When processing an application for approval, HMRC will check the application against the records of the applicant and the key people involved in the business to make sure they have not been involved in or connected to significant revenue non-compliance or fraud. HMRC must also be satisfied that they fulfilment house has complied with all HMRC requirements. It is important therefore for fulfilment businesses to conduct a review of its systems and controls to ensure that it has appropriate processes in place to support it application.

Businesses which are not approved will not be able to trade from 1 April 2019.

Due diligence and reporting obligations

From 1 April 2019, an approved fulfilment houses will be subject to the following obligations:

(a) to inform HMRC where a customer is not meeting certain UK obligations; (b) to give a notice to customers informing them of their UK obligations; (c) to keep records and undertake due diligence in relation to customers; (d) to verify a customer’s VAT registration number; and (e) to inform HMRC of any change to registered details or to inform HMRC if the business ceases to trade as a third country goods fulfilment business.

Sanctions and penalties

There are severe consequences for business which trade without approval from HMRC and which breach the obligations imposed by the Regulations.

Any person carrying on a third country goods fulfilment business from 1 April 2019 without approval from HMRC will commit a criminal offence. If found guilty, the person is liable to imprisonment or a fine or both. Further, the person may be subject to a penalty from HMRC of up to £10,000 and the goods that it stores will be liable to forfeiture.

There will also be a fine of £3,000 for each breach of the obligation to inform HMRC when a customer is not meeting their UK obligations and a fine of £500 for each breach of any other obligation under the Regulations.

What steps should be taken?

Fulfilment houses which are already trading should now start to prepare their application for approval and file this by the applicable deadline.

In addition, businesses should conduct a systems review to establish where new processes or controls are required to be introduced in order that they can meet their obligations under the Regulations from 1 April 2019. For some businesses, significant changes to existing systems will be required.